The president, CEO and Chairman of the Executive Committee of broker and investment advisor Melhado, Flynn & Associates, George Motz, pleaded guilty to securities fraud charges earlier this week. U.S. v. Motz, Case No. 08-598 (E.D.N.Y. Filed Aug. 27, 2008). The indictment also named the firm as a defendant.

According to the superseding indictment, Mr. Motz engaged in a “cherry picking” scheme between 2000 and 2005. In this scheme, Mr. Motz would place trades and later allocate them to accounts depending on their profitability. Initially Mr. Motz cherry picked trades for the proprietary account of Melhado Flynn. Since he was the sole trader at the firm, Mr. Motz would place trades in the morning. Typically he waited several hours before telling the trading desk where to allocate particular trades. If it was profitable, he generally placed it into the firm’s proprietary trading account and would close it out at the end of the day. If the trade was not profitable, he would typically allocate it to Third Millennium Fund, Investment Fund # 1, his discretionary client accounts or all three. The two funds are investment vehicles for high net worth individuals.

In November 2002, Melhado Flynn and Mr. Motz made a presentation to Investment Fund # 1 to convince them to invest in Third Millennium Fund. During the presentation Mr. Motz claimed he had achieved a 38% return in the broker’s proprietary trading account in 2001 and a 20% return in 2002. He did not inform them that the results were based on cherry picking. Subsequently, the fund invested $2 million. The results however were poor. To improve performance Mr. Motz began assigning profitable trades to the two accounts. During the same period he stopped assigning profitable trades to the firm’s proprietary trading account. Rather, Third Millennium Fund and Investment Fund # 1 became the primary beneficiaries of the cherry picking scheme. Over a two year period beginning in June 2003, every trade assigned to the two funds was profitable.

In 2003 during examinations by the NASD and the SEC, defendant Motz took steps to conceal his scheme. Specifically, he altered the order tickets to ensure that the scheme would not be detected.

A sentencing date has not been set. DOJ’s Press Release is available at http://www.usdoj.gov/usao/nye/pr/2009/2009oct13.html. Previously, the SEC brought an administrative proceeding against Mr. Motz, Jeanne McCarthy, the comptroller and financial and operations principal of the firm, and the broker dealer. In the Matter of Melhado, Flynn & Associates, Inc., Adm. File No. 3-12574 (Filed Feb. 26, 2007).

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